THE FINANCIAL CRISIS : BANKING

Facing up to the downturn

Insuring deposits may cost savers

WASHINGTON — When it comes to the money in your bank account, security has a price. And it's going up.

With the failure of Pasadena-based IndyMac Bank and a dozen other institutions draining the government's deposit insurance fund well below its mandated level -- and projections of more failures to come -- federal regulators moved Tuesday to replenish the fund, giving initial approval to a five-year plan that would more than double the amount banks pay to insure their deposits.

Bankers said they could afford the increase approved by the Federal Deposit Insurance Corp., which on average would cause premiums to rise to 13.5 cents per $100 of deposits from 6.3 cents. But they noted that higher premiums would add to the cost of doing business in already difficult times.

That means consumers should expect slightly higher fees and lower interest rates, said Ed Mierzwinski, consumer-program director for the U.S. Public Interest Research Group.

"The banks have always had the imprimatur of federally guaranteed insurance . . . that has encouraged conservative investors to put their money in banks," he said. "Unfortunately they're going to pay for the risks that bank executives took on with their reckless mortgage lending in the form of higher premiums."

Federal officials boast that no customer has ever lost a cent of a federally insured deposit, a guarantee made since the Depression that has kept consumers from draining their bank accounts in subsequent financial crises. To expand that confidence, Congress included in the recently approved Wall Street bailout legislation a temporary increase in the coverage for individual accounts to $250,000 from $100,000.

"In other words, if you've got cash in a bank of up to $250,000, it's safe," President Bush said Tuesday. "The FDIC has never failed to make good on its promise, and it won't fail to make good on its promise."

But to keep that promise, the FDIC needs more money.

The deposit insurance fund had $45.2 billion as of June 30, representing 1.01% of insured domestic deposits, its lowest ratio since 1994. The fund is not supposed to fall below 1.15%, and the FDIC prefers it to be at 1.25%.

The FDIC estimates this year's bank failures will cost the fund almost $13 billion and projects additional failures will drain an additional $27 billion by the end of 2013.

"The industry understands the need to do this and understands the need from a public-confidence perspective," FDIC Chairwoman Sheila Bair said.

The proposed premium increases, which would take effect Jan. 1, would pump $10 billion into the fund next year and bring the ratio to insured deposits up to 1.26% after five years. The FDIC projects the increases would lower pretax earnings for the banking industry by 5.6% next year.

"The basic rate is already relatively low, so in dollar terms the impact is not that great," said Tom McCullough, chief executive of First Regional Bank in Century City, which has 10 branches in the Los Angeles area.

"It's still a cost that the industry will be bearing, as it always has, in order to keep the FDIC fund on firm ground."

Bert Ely, an independent banking consultant, noted that after the savings and loan crisis in the late 1980s, an average bank paid premiums of about 15 cents for each $100 of deposits for seven years to rebuild the fund.

"They're not going to pay it happily, but they can handle it," Ely said.

Wayne Abernathy, executive vice president for financial institution policy at the American Bankers Assn., said the biggest effect would be on lending. Insurance premiums are paid out of capital, which banks use to make loans.

"Every dollar in premiums we pay is about $10 in lending we can't do," he said.

The proposed increases are "probably a little more aggressive" than the industry anticipated, Abernathy said. But given the importance of the fund to consumer confidence, he said, "I can understand in the current climate their nervousness."